Fannie Mae Records 2Q Loss as Credit Costs Rise; Cuts Dividend

Fannie Mae swung to a second-quarter loss as the largest buyer of home loans booked $5.35 billion in credit-costs from boosting loss provisions and charge-offs.

The firm also slashed its dividend again from the last quarter, this time 86% to five cents a share, a move expected to save the mortgage buyer $1.9 billion in capital through 2009.

Fannie Mae shares fell 11% to $8.85 in recent premarket trading.

The company  which said Friday that 2008 will be its peak year for credit-related expenses  also announced plans to cut annual operating costs 10% by the end of 2009, increase its guaranty fees and manage its balance sheet to conserve capital.

The mean estimates of analysts polled by Thomson Reuters were for a loss of 68 cents a share on $3.4 billion in revenue.

Chief Financial Officer Stephen Swad said, "Despite the turmoil in the market, our guaranty volumes and strong portfolio spreads demonstrate the underlying strength of Fannie Mae's core business and its ability to generate revenue in a very challenging market. Nevertheless, the credit picture remains very difficult."

The $3.7 billion puts Fannie's combined loss reserves as of June 30 at $8.9 billion, up 71% from the first quarter.

As of June 30, the serious delinquency rate  whose rise Fannie called "a significant factor" in its credit-loss provision increase  was 1.36%, up from 0.98% as of Dec. 31, 2007 and 0.64% a year ago.

Loan charge-offs, excluding fair value losses, were $945 million in the second quarter, up 50% from the first quarter.

Looking forward, Fannie raised its forecast for its full-year credit loss ratio to 0.23 to 0.26, up from 0.13 to 0.17, and anticipates the ratio will increase further in 2009 compared with 2008. The company added that it expects "significant additions" to its combined loss reserves through the remainder of 2008, and noted that while 2008 is expected to be its "peak year" for credit-related expenses, the total amount of credit-related expenses "will be significant in 2009."

Together, Fannie and Freddie Mac own or guarantee about $5 trillion of mortgages or nearly half of all U.S. home mortgage debt outstanding. But as housing prices weaken further and mortgage defaults rise, shareholders have worried that the mortgage giants don't have deep enough pockets to weather big losses and will have to raise funds in ways that will dent returns to existing investors.

Wednesday, Freddie set a dour tone for the pair as it reported an $821 million loss and said it expects further red ink for the rest of the year as more Americans default on their mortgages and home prices drop. Freddie also announced plans to slow growth in its portfolio of mortgage-related securities, a decision that was seen hobbling the already weak market for home loans.

That helped ready the markets for a similarly large loss from Fannie, while also spreading concerns that Fannie  which has been less aggressive in recent months in its mortgage purchases  may also plan to slow growth in its portfolio of mortgage-related securities. Such a move, along with the plans from Freddie, could possibly trigger a loss of confidence among investors, leading to a broader sell-off of mortgage investments, freezing up the market. Not only would portfolio valuations be hurt, but precious capital could also be needed to provide for additional losses stemming from deteriorating credit conditions.

Freddie shares were down 5.8% premarket to $5.55.

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